Arbitration Trumps Insolvency , English High Court finds

In a follow up to my earlier article on Arbitration and Liquidation: Never the Twain Shall Meet?, there is now a recent English High Court decision that raises a few more questions on whether arbitration would trump liquidation.

Texas_Hold_'em_Hole_Cards

English High Court Decision

In Philpott & Orton v Lycee Francais Charles De Gaulle School [2015] EWHC 1065, the wound up company had earlier entered into a contract with a school. This contract contained an arbitration clause. The company subsequently went into creditors’ voluntary liquidation. The school filed a Proof of Debt with the liquidators. There was a dispute on the final account and a dispute whether a set-off based on mutual dealings could be applied. The liquidators’ position was that £615,000 is due to the company while the school claimed it was owed £270,000. The liquidators applied to the court for directions on how to resolve this issue.

The school objected to the liquidators’ application for directions on the ground that the arbitration clause was still binding between the wound up company and the school. The school successfully applied for a stay under the Arbitration Act 1996.

It was held in this case that arbitration would trump the insolvency procedure of the Court giving directions on the final account. There was a dispute as to whether the company could claim a set-off since the liquidators were asserting that the company was owed that substantial sum as well. Therefore, the Court held that if the company were to bring proceedings against the school, such proceedings would have to be initiated by the liquidators of the company through arbitration.

Further, the English High Court also examined the issue of the school having filed a proof of debt and held that this did not prejudice the school’s reliance on the arbitration clause. The Court found nothing inconsistent with filing the proof of debt and then still bringing an arbitration claim. In such a case, the liquidator and the winding up court could wait the outcome of the arbitration before dealing with the proof of debt.

Malaysian Position on Arbitration vs Winding Up Procedures

I briefly examine how these facts and issues may have played out in Malaysia.

(i) Statutory Stay and the Proof of Debt Process

As an introduction, in a compulsory winding up and a creditors voluntary winding up, the law provides for an automatic stay of legal proceedings against the wound up company, except if the Court grants leave to proceed against the company (see the statutory stay under section 226(3) of the Companies Act 1965 for a compulsory winding up and section 263(2) for a creditors voluntary winding up). As an aside, I have written about a Malaysian Court of Appeal decision that suggests that there is a statutory stay even in a members voluntary winding up.

The legislative intent of the statutory stay is that the liquidator of the wound up company should not be forced to incur unnecessary expenses through defending legal actions if the creditors can obtain their relief within the winding up process through the filing of a proof of debt. This preserves the pari passu distribution, allows the cheap summary process of determination of the proof of debt, and preserves the assets in liquidation from being spent on litigating multiple suits (see generally, the Supreme Court case of Mosbert Berhad (in liquidation) v Stella D’Cruz [1985] 2 MLJ 446). Therefore, in almost all cases, if a creditor merely wishes to pursue a monetary claim, the appropriate process is to comply with the statutory process and file a proof of debt.

On these principles, it should ordinarily be the case that the insolvency procedure of the proof of debt trumps arbitration. If a creditor intends to bring a claim in arbitration against a company in compulsory or creditor voluntary liquidation, then the creditor must apply for leave from Court to proceed. Ordinarily, a monetary claim, even subject to an arbitration clause, should then be dealt with through the proof of debt. The wound up company should not have to expend money, thereby depleting the asset pool for the other unsecured creditors, in defending a claim in arbitration.

Taking it further, even if the creditor were to succeed in its arbitration claim and were to obtain an arbitral award, that creditor cannot execute against any of the assets of the wound up company. The creditor would still need to file in a proof of debt. Of course, the quantum in the proof of debt becomes much more concrete and the liquidator would find it difficult to reject the proof of debt. The argument by such a creditor pursuing the arbitral claim (and this is also inherent in the English High Court decision) would be that the creditor wants to pursue the contractually-provided platform to determine the quantum of that claim. The creditor wants the agreed arbitral tribunal to determine the claim and not the liquidator to determine the claim in the proof of debt process.

(ii) Arbitration Stay of Seeking Directions in Winding Up

 In a winding up, it is possible for a liquidator to seek directions in any particular matter arising under the winding up (section 237(3) of the Companies Act). It is quite possible, just like in the English High Court decision, that the directions sought may impact on a claim which is subject to an arbitration clause. Section 10 of the Arbitration Act 2005, which allows for a stay of court proceedings pending arbitration, refers to any court proceedings which are “brought in respect of a matter which is the subject of an arbitration agreement” and that could be wide enough to even cover such directions sought in a winding up. It will be interesting to see how such objections or applications would be dealt with in Malaysia.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s